Is A 125 Year Lease Long Enough?

Nikka Sulton

Is A 125 Year Lease Long Enough?

It’s a pretty bold statement, but in short, a 125-year lease is not long enough to provide the security and flexibility desired in property ownership and investment. While it may seem like a substantial period, various factors come into play, such as the potential impact on property value over time, the complexities of lease extension processes, and the evolving dynamics of the real estate market. Let’s delve deeper into why this duration might fall short and explore the implications for landlords and investors alike.

What is leasehold?

There are two primary forms of property ownership: freehold and leasehold. Freehold grants permanent ownership of both the building and the land it occupies. In contrast, leasehold ownership entails:

Partial ownership of the building for a specified duration.
Lack of ownership of the land beneath the property.

Under a leasehold arrangement, the portion of the property owned is termed the “demised premises,” as defined in the lease agreement. Typically, this encompasses the interior of the flat, including wall surfaces, ceilings, and joists. However, structural elements like external walls, roofs, and communal areas such as stairs and gardens are typically excluded from the demised premises.

Leasehold properties are governed by legal agreements that bind all occupants to the landlord (freeholder). These agreements facilitate adherence to various rules and obligations outlined in the lease, including:

Payment of service charges to cover building management, maintenance, insurance, and communal area upkeep.
Compliance with covenants, which may include restrictions on certain activities like operating a business from the property.

How long should a lease be when buying a flat?

Leases come with a notable limitation: their fixed term. When selling a leasehold flat, the buyer obtains the remaining years on the lease, referred to as the “lease term.” Eventually, as the lease term concludes, ownership reverts to the freeholder.

While there’s no fixed term for a lease, older residential leases often lasted for 99 years. Nowadays, most new leases span at least 125 years or even longer. The primary rationale for longer leases is to enhance mortgage eligibility. Mortgage providers typically decline loans for leasehold properties with insufficient lease terms, often below 90 years. A dwindling lease term significantly impacts the flat’s value and the owner’s ability to remortgage or sell.

Statutory lease extension

Fortunately, there’s a legal solution. If you meet the eligibility criteria, the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) grants you the right to:

Extend your remaining lease term by 90 years.
Eliminate the ground rent.

Additionally, you have the option to voluntarily extend your lease without resorting to the statutory process.

Marriage value

Yet, the expense of extending a lease surges notably when the remaining term dips below 80 years. This hike is due to the inclusion of ‘marriage value’ in the calculation.

Marriage value denotes 50% of the rise in the property’s market worth resulting from the lease extension. Essentially, it signifies you and your landlord dividing the financial gain from extending your short lease. However, marriage value frequently amounts to tens of thousands of pounds, in addition to the fundamental cost of extending the lease.

Is 125 year lease long enough?

When purchasing a flat, future saleability is crucial. A lease term of 999 or 250 years poses little concern, but with a 125-year lease, issues arise after 35 or 40 years. Each year of ownership diminishes the property’s appeal to potential buyers, making it challenging to sell or secure a mortgage.

While the Act allows for one lease extension, costs escalate as the term nears 80 years, even without marriage value. Extending the lease early offers certainty and reassurance to future buyers, even if most of the 125-year term remains.